Charles Schwab, U.K., Limited

Charles Schwab, U.K., Limited
Type here for Search

Market Update

Schwab clients get the latest in-depth U.S. market news as well as analysis and commentary from respected sources, both proprietary and third party.

Posted: 1/23/2018 4:15 PM EST

Markets Diverge Amid Mixed Bag of Earnings

U.S. equities finished mixed amid a slew of divergent earnings reports, with positive results from Travelers overshadowed by disappointing reports from Procter & Gamble, Johnson & Johnson and Verizon to weigh on the Dow. Meanwhile, a rally in technology stocks on the heels of Netflix's earnings helped to support the Nasdaq. Treasury yields continued to pare back after touching multi-year highs and the U.S. dollar extended its drop to multi-year lows, while gold and crude oil prices finished higher.

The Dow Jones Industrial Average (DJIA) fell 4 points to 26,215, the S&P 500 Index gained 6 points (0.2%) to 2,839, and the Nasdaq Composite jumped 52 points (0.7%) to 7,460. In moderate volume, 792 million shares were traded on the NYSE and 2.1 billion shares changed hands on the Nasdaq. WTI crude oil advanced $0.90 to $64.47 per barrel and wholesale gasoline added $0.03 to $1.91 per gallon. Elsewhere, the Bloomberg gold spot price gained $7.24 to $1,341.16 per ounce, and the Dollar Index—a comparison of the U.S. dollar to six major world currencies—lost 0.3% to 90.13.

Dow member Procter & Gamble Co. (PG $89) reported Q4 earnings-per-share (EPS) of $0.93, or $1.19 ex-items, versus the $1.14 FactSet estimate, as revenues rose 3.0% year-over-year (y/y) to $17.4 billion, roughly in line with expectations. The company said its earnings benefited from the Tax Cuts and Jobs Act (TCJA), but its gross margin came in below expectations. PG maintained its full-year sales outlook, while raising its EPS guidance to reflect the potential benefit from the TCJA. Shares were lower.

Dow component Johnson & Johnson (JNJ $142) posted a Q4 loss of $3.99 per share, or EPS of $1.74 ex-items, compared to the projected profit of $1.72 per share, with revenues increasing 11.5% y/y to $20.2 billion, north of the expected $20.1 billion. The company said its earnings results reflected a $13.6 billion charge related to the TCJA, but it saw robust performance in its pharmaceuticals business. JNJ issued full-year guidance that was above estimates, noting that the TCJA enables it to invest in innovation at higher levels. Shares finished lower.

Netflix Inc. (NFLX $250) announced Q4 earnings of $0.41 per share, roughly in line with expectations, as revenues rose 32.6% y/y to $3.3 billion, mostly matching estimates. Domestic and international streaming subscriber additions easily topped forecasts and the company issued Q1 guidance that exceeded expectations. Shares rallied.

Dow member Travelers Companies Inc. (TRV $146) reported Q4 EPS of $1.98, including charges related to catastrophe losses and the TCJA, or $2.28 ex-items, versus the forecasted $1.50, with net premiums written growing 6.0% y/y to $6.4 billion, above the expected $6.3 billion. Shares gained solid ground.

Dow component Verizon Communications Inc. (VZ $53) posted Q4 earnings of $4.56 per share, or $0.86 ex-items, versus the projected $0.88, as revenues rose 5.0% y/y to $34.0 billion, above the expected $33.2 billion. Retail subscriber additions for its wireless segment easily topped forecasts, while its subscriber additions for its FiOS and DSL businesses missed estimates. The company said tax-reform legislation will have a positive impact. Shares were lower.

Schwab's Chief Investment Strategist Liz Ann Sonders notes in her latest article, Taxman: Bringing Some Cheer in the New Year, the impact of the TCJA is already being felt by millions of workers—with the vast majority of the remainder getting a bump in their paychecks next month. More broadly, we should get a boost to consumption, GDP, capex and corporate earnings; but there are important offsets and considerations that suggest some enthusiasm-curbing may be in order given the later-stage in the cycle in which the TCJA was passed. Also, Schwab's Director of Tax and Financial Planning, Hayden Adams, CPA, offers investors analysis on the tax overhaul in his article, New Tax Law: Here’s What You Need to Know.

Growth in regional manufacturing activity slows more than expected

The Richmond Fed Manufacturing Activity Index fell to 14 in January from 20 in December, versus the Bloomberg estimate of a decrease to 19. However, readings above zero denote expansion. Shipments and employment solidly declined but continued to grow, while new order volume was unchanged at 16 and order backlog moved back into expansion territory.

Treasuries were higher, with the yields on the 2-year and 10-year notes, as well as the 30-year bond falling 3 basis points (bps) to 2.04%, 2.62% and 2.90%, respectively.

Treasury yields have pared a recent rally to multi-year highs and the U.S. dollar has extended a fall to multi-year lows, amid the backdrop of broad-based global economic growth, early optimism regarding tax reform, and as global central banks appear to be turning down the path to normalization. The markets have mostly shrugged off the recent flare-up in political uncertainty as Congress yesterday voted on a short-term funding bill that ended a three-day government shutdown. Schwab's Vice President of Legislative and Regulatory Affairs, Michael T. Townsend discusses the agreement in his latest article, Congress Strikes Deal to End Government Shutdown, noting that it just sets up another possible shutdown next month, adding a potential element of uncertainty to the market’s booming start to 2018.

The 10-year Treasury yield has grinded higher since hitting a near 10-month low in early September, but housing sales have yet to show signs of slowing, with November existing home sales jumping to near an 11-year high. Tomorrow, as the U.S. economic calendarheats up, we will get the latest read on existing home sales, expected to dip 1.9% month-over-month to an annual rate of 5.7 million units in December.

Schwab's Chief Fixed Income Strategist Kathy Jones notes in her latest article, Monetary Tightening and Inflation Could Wake the Bond Bears,that fundamentals appear to be setting up for rising bond yields in 2018. However, she adds that this could be a positive for investors who have been waiting a long time for yields on lower-risk fixed income investments such as Treasuries and investment grade bonds to rise.

Other reports on tomorrow's economic docket include weekly MBA mortgage applications, as well as Markit's business activity reports, forecasted to show expansion in manufacturing and the key services sector continued to be solid this month. As noted in the latest Schwab Market Perspective: Party Like it's 2017!, this year seems unlikely to be a repeat of 2017 as volatility should pick up and the possibility of a larger pullback than what we saw last year has grown. We still believe that the bull has room to run as domestic economic strength is improving and global economies look better than they have in some time, so investors should stay disciplined, diversified and invested.

Europe mixed amid eased political uncertainty, Asia higher after BoJ decision

European equities finished mixed, with yesterday's vote to end the U.S. government shutdown joining signs of progress in German coalition talks to ease political concerns, though U.K. Brexit uncertainty lingered. Schwab's Chief Global Investment Strategist Jeffrey Kleintop, and Vice President of Trading and Derivatives Randy Frederick also offer guidance for investors amid the political environment in the video, Political Risk: How Should Investors Respond?. Earnings and economic data in the region also aided sentiment, as German investor confidence rose to an eight-month high and eurozone consumer confidence topped forecasts for January. However, the euro turned higher versus the U.S. dollar, which extended its recent drop, to cause the markets to diverge ahead of Thursday's monetary policy decision from the European Central Bank. The British pound moved lower in choppy trading versus the greenback, while bond yields in the region were mostly lower. Schwab's Jeffrey Kleintop points out the Five Global Risks for Investors in 2018: geopolitics, chasing returns, private investment boom, return of inflation, and natural disasters, adding that having a well-balanced, diversified portfolio and being prepared with a plan in the event of an unexpected outcome is a key to successful investing. Finally, Jeff offers his latest article for international investors to digest, Expecting the Unexpected: Is a Demographic Disaster Looming?.

Stocks in Asia finished higher, with the U.S. ending a three-day government shutdown and the Bank of Japan (BoJ) holding its monetary policy steady. As the BoJ kept its monetary policy stance unchanged, Governor Kuroda delivered his post-decision briefing and appeared to try to dampen expectations that the central bank was heading toward changing its current monetary policy stance, which had risen as the BoJ recently trimmed its monthly asset purchases. Stocks in Japan rallied with the yen showing some early weakness versus the U.S. dollar. Financials were higher to boost markets in China and Hong Kong, while equities in Australia, South Korea and India also advanced nicely. The markets moved back into rally mode after the eased U.S. political uncertainty and Schwab's Chief Investment Strategist Liz Ann Sonders and Randy Frederick discuss the question in the video, How Much Longer Could the Bull Market Last?, talking about some of the data that Liz Ann watches to help gauge when this momentum might begin to slow down a little bit.

Markit's Manufacturing and Services PMIs from around the globe will take center stage on tomorrow's international economic calendar, while other reports of note include trade data from Japan, PPI from Spain, and debt statistics from the Eurozone.

Schwab Center for Financial Research - Market Analysis Group

©2018 Charles Schwab & Co., Inc., Member SIPC. All rights reserved.

Schwab Center for Financial Research ("SCFR") is a division of Charles Schwab & Co., Inc. The information contained herein is obtained from third-party sources and believed to be reliable, but its accuracy or completeness is not guaranteed. This report is for informational purposes only and is not a solicitation, or a recommendation that any particular investor should purchase or sell any particular security. The investment information mentioned here may not be suitable for everyone. Each investor needs to review an investment strategy for his or her own particular situation before making any investment decision. All expressions of opinions are subject to change without notice in reaction to shifting market conditions.

1 - IB1
Schwab or its affiliates has managed or co-managed a public offering of securities for this company in the past 12 months.

2 - SO2
Schwab and/or its officers own options, rights or warrants to purchase the securities of this company.